Speech By Tun Dr. Mahathir Bin Mohamad

2122 words - 9 pages

SPEECH BY TUN DR MAHATHIR BIN MOHAMAD ON “ISLAMIC FINANCE AS THE MEANS TO REVIVAL OF ISLAMIC RENAISSANCE” ORGANISE BY LABUAN INTERNATIONAL ISLAMIC LECTURE AT CONVENTIONAL HALL, FINANCIAL PARK COMPLEX, LABUAN ON 11 NOVEMBER, 2010 --------------------------------------1. We talk a lot today about Islamic Finance – especially we who are Muslims. But Islamic finance is still in its infancy, in comparison with conventional banking. While it has been accepted even by non-Muslims, it has not as yet been able to displace significant portion of the conventional banking system. 2. Islamic banking is basically concerned with elimination of interest or riba in the repayment of loans. But quite obviously ...view middle of the document...

The sale of goods and services constitute trade, an economic activity requiring financing – domestic and international. The production of goods and services and the trade in them causes wealth to be created and economies to grow. The benefits accrue to everyone from the poor workers to the suppliers and processors of raw material, the manufacturers, distributors, vendors and on to the investors and financiers. Everyone gains from the business involved in the production of goods and services and the trade which are all financed by the banks. The banking service is therefore an essential service to enable wealth to grow and be distributed within human society. 7. But the power of the banks to create and lend money should be exercised with prudence. Unfortunately the greedy saw in the power of the banks to create money i.e. the possibility of making almost unlimited amounts of money for themselves, not through production of goods, services and trade but through manipulating the banking and financial systems.

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8. For example, without considering the capacities of the borrowers to repay the loans, the banks lent money to the high risk borrowers. To mitigate the risk they insured the loans or sell them to secondary mortgage companies. With this they believed the risky loans were secured. Eventually the amounts of unpaid (nonperforming loans) became so big that they had to be recorded in the bank books as losses. Even the insurance and mortgage companies could not make good the losses, so that they too failed and became bankrupt. 9. It is much more difficult for Islamic banking to lend beyond prudence because of the requirement for risk sharing between the bank and the borrower. But even then, should Islamic banking, in the interest of greater profit consider and find ways and means of lending beyond prudence? This can happen if Islamic bankers succumb to greed and ignore the tenets of Islam which is clearly against excessive profits. 10. But there are other practices of conventional banking and finance which may tempt Islamic bankers to copy. Leveraging loans based on amounts invested may enable bigger profits to be made. The loan to hedge funds and currency traders can be 20 – 30 times more than the invested capital. With these bigger amounts, the profits from investment would also be much bigger. But what the managers often fail to stress is that when losses are made, the losses would also be much bigger. It can be so big that the whole amount invested may not be able to cover the losses. Failure of such transactions as carried out by hedge funds and currency traders will bankrupt the funds and the lending banks as well. 11. With that not only the investors but the fund managers and the banks would be bankrupt. The collapse of the big banks will lead to a financial crisis which can destroy even the richest economies. 12. Again, Islamic banks may not be open to high leverages because interest is not permitted and the requirement of risk...

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